by Tony Vidler

The most challenging area of financial advice which is subject to perpetual testing is the question of “suitability”. WHY was a particular piece of advice appropriate for a particular client? What factors were considered, or even discarded, that led to a particular recommendation as being the right advice?

It is an area that holds the attention of the media, litigators, regulators, the judiciary, financial institutions and disputes resolution schemes, and of course advisers themselves. This is largely because it is a subjective matter, in a field where you will often receive half a dozen opinions from half a dozen well qualified people – all using the same underlying facts. And they frequently will come to half a dozen different expert conclusions.

Giving advice is simply not an absolute science. The very nature of “advising” is to provide a professional opinion. And opinions certainly vary enormously amongst professionals on virtually every topic under the sun.

Yet despite all of that, the adviser will be held responsible and accountable for the advice they provided. Whether the challenge in the future concerning the suitability of advice is driven by poor product performance, or whether it is due to a failed strategy, the defence for the adviser will come down to 3 key factors:

1. was the process transparent?

2. was the advice suitable taking into account known circumstances, or those that should have been known?

Point 2 on the other hand….well therein lies the danger and the artistry.

It is a given that when the advice is provided only known circumstances and factors can be taken into account – and there are always more new dangerous unknowns lurking about that nobody thought of, or which were not recognised as dangerous things at that moment in time. That is especially true of the consumers themselves: they frequently fail to disclose or reveal information which may well be significant, but which is not perceived as significant by them.

So virtually no advice is ever really totally circumstance-proof, and rarely does it actually (in the real world) factor in every conceivable possibility or fact. Nor is advice in itself something which removes risk for clients, even if there were total disclosure of facts and circumstances.

Compounding the issue of determining suitability is that it is the performance of a financial product which is generally the trigger event that raises the question of whether the product or strategy or advice was suitable. That is, when a financial product does not perform as the consumer expected, the bulk of the suitability testing falls on the advice component, rather than the product. Product or strategy failure triggers the question of advice negligence. Not terribly fair, but that is our lot in life it seems.

So how can one go about defending the position of “why this advice is appropriate”?

Providing suitable advice for a particular client situation is an art form, and the beauty is ultimately going to be in the eye of the client beholder. Usually that critical inspection of the advice will take place a long time after the advice was given, and the circumstances and memories have become questionable.

It is vital therefore that in determining suitability (and then being able to evidence it at some point in the future) that two sets of facts are captured and recorded in some manner. The first are the facts which have been taken into account, or which have been determined as key priorities or issues. The other is the facts which have been collected, but set to one side as either being immaterial or such a low priority that they were to be effectively ignored. Both are required in the future to test the suitability of advice given at some point in the past.

The real art of providing suitable advice is to form a professional recommendation as to what is “most likely” to be the optimal solution for a client taking into account the facts that matter most to them at the time. It is a process of balancing competing factors and priorities against limited resources or appetite for following advice to find a workable plan.

Nearly all advice involves compromise at some point, and nearly all advice carries ongoing exposure of an adverse outcome for the client.

It follows that a critical element in evidencing suitability in the future comes down to being able to demonstrate that you carefully conveyed precisely to the client that the advice was “most likely” to produce the outcome they were looking for. It wasn’t (or isn’t) foolproof; not guaranteed; and; not a certain outcome. The advice was the recommendation “most likely” to work, and that message carries bears the weight of any future suitability testing.

Clearly in forming the recommendation it is vital that the clients needs are identified. We have to begin by knowing as much as possible in order to ultimately find workable compromises which are likely to succeed.

The next part is the area that many advisers do not think through, or do particularly well, is prioritization. This is THE essential step in providing advice that is most likely to be most suitable for the client’s situation. The client will often have multiple (and sometimes competing) needs, and it is critical to establish a priority list – something has to be more important to get right than another thing. The something else is second in importance, and so on.

Identifying the needs, and then prioritizing them, are the canvas and the oils. The artist then goes to work with these ingredients to create something unique for the client. The artwork is not the underlying ingredients, it is the image and end result created from them.

Provided these two critical steps are undertaken AND the client understands that the recommended advice is suitable as it is most likely to produce the desired result, then it should result in advice suitability rarely being seriously challenged. Provided you can evidence it.

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Comments (3)

Great post Tony! Though doing the job properly will not reduce the risk of the advice being seriously challenged, as hindsight is usually involved, but it will provide an excellent platform for which to defend the challenge and reduce the risk of it being found unsuitable. We see the recording of prioritisation and/or the reasoning behind why a particular strategy was selected, lacking in 70% of advice documents we see.

Thanks Barry. You are quite right – hindsight always consists of 20/20 vision, which we don't always have in advance. I am not hugely surprised by the number you quote, but appreciate the validation of what I believe to be the missing link for many advisers..